The buyer is demanding we carry a seller note for fifteen percent of the purchase price, but they want a broad set-off clause that lets them unilaterally withhold our monthly payments if they claim we breached any representations or warranties. How do we structure the note to prevent them from holding our cash hostage?

Question

Tyler Smith · Accepted Answer

A broad, unilateral set-off clause turns your seller note into a weapon for the buyer. If they hit a rough patch or regret the purchase price, they can easily invent a representation breach, stop making note payments, and force you into an expensive legal battle to get your money back. You must reject any language that allows the buyer to unilaterally withhold payments. Instead, negotiate a structured dispute resolution framework for any alleged breaches. First, require that the buyer provide written notice of any claim with specific, documented evidence before they can hold back a single dollar. Second, establish an independent third-party escrow account for disputed funds. If a legitimate claim is raised, the buyer does not get to keep the cash. Instead, they must deposit the disputed payment into this neutral escrow account while the issue is resolved. This prevents the buyer from improving their own cash flow under the guise of an indemnity claim. Third, restrict the use of set-off rights to final, non-appealable judgments or mutual written agreements. This ensures that your monthly note payments continue uninterrupted unless a court or arbitrator rules otherwise. Finally, bring this issue to your weekly Level 10 Meeting to align your leadership team on the exact representations and warranties you are making. Having your core processes documented and validated under your EOS framework is your best defense, as it minimizes the risk of any actual breaches occurring in the first place.